What is the fundamental challenge for the commodities industry?

in Commodities Trading, 17.04.2019

Recently the Financial Times organized a global commodities summit in Lausanne. As commodities trading is an important sector in Switzerland, it may not be a coincidence that this conference took place in Switzerland. Many topics relevant for the commodities industry were discussed at the conference.

One of the biggest challenges the industry is facing is a dual one: the need to meet rising demand for energy and natural resources while at the same time reducing carbon emissions.

For both elements, the role of China appears to be critical.

Why a growing and increasingly urban population needs more commodities

The demand for commodities is closely linked to the size of world’s population and urbanization rate. Currently the world’s population is 7.7 billion, of which 55% lives in cities. In 30 years these numbers will be nearly 10 billion and 66%. Population growth combined with urbanization means a significant increase in the demand for natural resources.

90% of the population growth and urbanization will be in Asia and Africa, regions that will be dominated by China. China’s Belt and Road Initiative (BRI) announced by President Xi Jinping in 2013 will be pivotal in this respect. It is the most ambitious infrastructure project in modern history with the purpose of strengthening trade, infrastructure and investment links between China and an estimated 65 other countries. Together these countries account for more than 30 percent of global GDP, 62 percent of the world’s population and 75 percent of the energy reserves. It is a plan that will have serious implications for how the world develops.

To compete in such an environment, maintaining control over the access to supply of commodities appears to be the defining element.

Lowering carbon emissions is an imperative

To limit global warming to 1.5 degrees Celsius above pre-industrial levels means zero carbon emissions by 2055. This objective is one of the biggest challenges of our time.

The Intergovernmental Panel on Climate Change (IPCC) states that limiting global warming to 1.5°C would require rapid and far-reaching transitions in energy, land, urban and infrastructure (including transport and buildings), and industrial systems . These systems’ transitions are unprecedented in terms of scale and will require deep emissions reductions in all sectors, a wide portfolio of mitigation options and a significant upscaling of investments in those options.

In order to successfully reduce carbon emissions, much depends on China. It is the world’s largest emitter of carbon dioxide, and levels are rising at their fastest rate in years. Hitting worldwide climate goals will be nearly impossible unless China begins making sharp cuts soon. The good news is that President Xi Jinping is serious about reducing emissions and establishing the nation as a world leader on climate and energy issues, driven by concerns about air pollution, domestic energy, national security, and economic development.

Climate change regulations and laws will affect commodity flows by encouraging a move towards renewable energy sources and cleaner fossil fuels such as LNG. Carbon pricing will also create new opportunities. By spotting these opportunities and through efficient capital allocation, the commodities industry will contribute to speeding up technical innovation.

Where do we go from here?

We need to make sure that our industries stay competitive and have access to vital natural resources. Companies need to identify which commodity inputs are most crucial for their production processes and define strategies how to secure competitive access to those commodities.

We all have a role to play in reducing our emissions. However, we need to be smart in the tools that we choose. Reducing our emissions at any price will harm industries if done without global coordination. China will be important in setting the tone. The commodities industry has an important role to play in facilitating the transition by responding effectively through pricing mechanisms.

Questions companies can ask themselves to stay ahead of the curve:

  • What are the potential implication of climate change policies on operations and markets?
  • How can we reduce carbon emissions and stay competitive?
  • How can we maintain competitive access to commodities that are vital?
  • How can we develop business models around emerging technologies and markets to address climate change?

We need to anticipate, mitigate and adapt. Above all, this challenge should be seen as an opportunity – an opportunity to rethink business models, tried and tested concepts and an opportunity to make the world a more comfortable place to live in.

 

 

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